Why Hong Kong landlords are already considering cutting rent relief?

After seven months of social unrest and over four months of the COVID-19 crisis keeping Hong Kong in isolation, its retail market is crippled. Shopping mall occupancy rates are diving, with many new vacant locations.

Local retailers (except supermarkets) are running out of cash to keep their stores open and keep their employees despite the government subsidy scheme announced last month.

Since the beginning of the social unrest, the Hong Kong Retail Management and other internaltional brands have been sharing with media the status of negotiations between retailers and landlords and how some landlords are making decisions month-by-month, with many reluctant to commit to a more straightforward six-month relief package. “Their rent reductions have been very unreasonable, not enough to help us through this difficult situation at all,” HKRMA’s Chairman, Annie Yau Tse said to Bloomberg. “We will continue urging landlords to stand with us in these tough times, with corporate social responsibility in mind.”

Discussing with our readership, mostly composed by retailers across categories that we also engage offline, the common feedback about the current situation has revealed a slight increase in sales showing signs of ‘recovery’, with a return of some local customers, however this is heavily driven by promotions and the spring summer season sales which started earlier for many brands, who were crawling under unsold inventory. Local distancing measures started to ease on May 7th and local consumers’ confidence improved together with it, but retail sales remain depressed without the 60 million annual inbound tourists.

So why should major landlords rethink cutting their help in this situation?

1. May retail sales are improving

May retail sales are improving, but they are fuelled by discounts or promotions and are still very far from the May 2019 level.

Landlords are monitoring closely and see an opportunity to stop the rent concessions, the relief given from February to April having had a strong impact on their base rental incomes, their results and their share price performance, for the listed ones.

Landlords looking only at the rent vs sales ratio to calculate the level of concession passed to their tenants has been a dangerous game as retailers and brands’ margins and results are deteriorating further with continued aggressive discounts.

2. The Mall Promotions

Some landlords including Swire, Hysan group, Wharf and SHKP activated some promotions in the form of vouchers, cash back or coupons, and CRM activations, which were for some partially subsidised together with their tenants to drive traffic in their malls and also support the F&B businesses.

Retailers confirmed it helped drive traffic and sales in the first half of May but the risk is very likely that the impact is short term and that local customers might not come back after the promotions are over. Landlords have invested in those promotions and may want to use their marketing investment to justify reducing or cutting their rent reductions under their shareholders’ pressure.

3. The positive trend in Mainland China

Landlords in Hong Kong have for the large majority a presence in Mainland China too. They foresee that international brands are recovering business and potentially profit in the Mainland Chinese market and might be able to hold longer in Hong Kong in the hope of the borders reopening with Mainland China.

While Hong Kong & Macau are in a better position than Europe or the US to see tourists again soon, despite the social unrest being unsolved, landlords are trying to buy time knowing tourists will not resume in numbers as they did pre-COVID-19.

“I can only speak personally, but I have no doubt that Chinese consumers will return to Hong Kong post-virus,” said Douglas Young, owner and founder of local lifestyle brand G.O.D , to SCMP. “I am far more concerned that the protests will resume after the epidemic, in which case all tourists will be really put off. “The protests halved my business from June to December, and the virus has further reduced it by another 40 per cent since January. The virus issue is resolvable and will be resolved, but the societal issues are more long-lasting.”

4. Disconnection between the leasing teams and the top management & shareholders

Large landlords in Hong Kong have been working historically with heavy pyramidal organisation with high turnover or rotation in their front line leasing teams. This may cause lack of full visibility on the current situation and wrong forecasts passed on to the top and the owners on realistic future occupancy rate and ability to recruit new tenants or overseas brands.

5. The government wages scheme and relief package

With the wage subsidy program kicking off in June for 6 months following the relief package announced earlier, some landlords believe retailers are getting enough relief to get through the worst of the retail crisis in Hong Kong and to keep their business afloat. According to the HKRMA survey and as shared by SCMP up to 15,000 retailers might close before end of this year and the wages scheme will not be sufficient for many retailers if it is not combined with continuous rental support.

Based on our sources and despite recent articles in the press announcing support extensions from landlords, Hong Kong retailers are still negotiating and battling for April concessions with SHKP. While in May, confirmed support comes from very few landlords including Swire and Mapletree North Asia Commercial Trust (Festival Walk). This latter, being a Singaporean company, is applying to Hong Kong the same generous behaviour shown in its own country because only supporting its tenants it will ensure business continuity for all.

Other large players such as Wharf, NWD, MTR Corp, Hysan, HK Land, Link, SHKP, ChampionREIT have not announced their intentions for May and this might accelerate retail bankruptcies in the coming weeks.

What can really change the game today and guarantee the future of Hong Kong as a still relevant and leading retail hub in Asia is to redefine the relationship between tenants and landlords based on the new level of productivity and realistic projections for 2021.

In this moment of world crisis, Hong Kong could become a successful example of how to turning a crisis into an opportunity.